Copy article

Tax-Free Childcare Is Judged On Adjusted Net Income, Not Salary

ended 06. August 2026

HMRC spent 4 August 2026 urging working families to sign up for Tax-Free Childcare, timing the push to Playday on 5 August, and its press release puts the income test in a single line: families qualify if they “each earn no more than £100,000 per annum”. That is not the test. Under regulation 15 of the Childcare Payments (Eligibility) Regulations 2015, a parent is treated as meeting the income condition only if they do not expect their “adjusted net income to exceed £100,000 for the relevant tax year”. HMRC's own eligibility page words the disqualifier the same way: you cannot claim if “you or your partner's expected adjusted net income (including any foreign income) is over £100,000 for the current tax year”.

Adjusted net income is not pay. HMRC defines it as “total taxable income before any Personal Allowances and less certain tax reliefs”, and its guidance counts employment income including benefits from the job, self-employed profits, most pensions, interest on savings, dividends, some rental income and foreign income. Gift Aid donations and pension contributions are then taken off, grossed up. So a parent on a salary comfortably below £100,000 can still be over the line.

And it is a cliff edge, not a taper. There is no taper, no de minimis and no easement anywhere in the regulations. One pound over the figure a parent expects for the tax year, and at the next declaration the whole entitlement goes: the £2 the government adds for every £8 paid into the account, worth up to £500 every 3 months, or £1,000 for a disabled child, and up to £2,000 a year per child, or £4,000 for a disabled child. The test applies to each parent separately, and section 3(1)(b) of the Childcare Payments Act 2014 requires a claimant's partner to meet the same income condition, so one side of a household tipping over ends it for the family. The account has to be signed in to every 3 months to confirm the family is still eligible, or the Tax-Free Childcare stops. The parent really caught is not the high earner who plans for this. It is the one whose bonus, or a few hundred pounds of savings interest, moved a number they never knew they were measured on.

  1. HMRC is telling parents the test is what they “earn”, when the rule it wrote is adjusted net income. Is that a harmless simplification, or a serious failure by the department that made the rule?
  2. A single pound over £100,000 removes the lot, and the test bites each parent separately rather than the household as a whole. Who does that catch hardest, and can a cliff edge like this be defended?
  3. What should a parent close to the line actually do before their next 3-monthly reconfirmation, and whose job is it to warn them? Do you have a client whose plans this would change? If so, please give as much colour and detail as possible.

5 responses from the Newspage community

Copy all

Star Quote
Copy

Editor
Harvey Dhillon
Founder & CEO at Zmartly
HMRC's own eligibility page gets the test right. It is adjusted net income, which sweeps in a bonus, savings interest and dividends. The press release inviting parents to sign up says "earn". That is a serious failure, not a simplification: the right words are on its own website. A lone parent £1,000 over £100,000 loses everything, while two parents £1,000 under it each, £198,000 between them, keep the lot. No cliff edge that does that is defensible. The lone parent is hit hardest: one income carries the household, and the family gets one test, not two. The useful part: this is a forecast, made on the day you tick the box, for the year to 5 April. A forecast can still be moved. Gov.uk's own sum knocks £1.25 off for every £1 paid into a personal pension, so £800 in moves the figure by £1,000. Warning parents is HMRC's job. Nothing changed this week but the wording, so I have no client whose plans this changes. Work out your own figure before you reconfirm.
Copy

Editor
Paul Denley
CEO at Oakham Wealth Management
HMRC's wording is simple, but perhaps too simple for a rule with such expensive consequences. People think in terms of salary; the legislation tests adjusted net income, which also captures dividends, savings interest, rental income and certain benefits, while allowing deductions such as pension contributions and Gift Aid. That distinction matters because this is a cliff edge, not a taper. A modest bonus or unexpected investment income can cost a family thousands. The parents most exposed are those just below the threshold who aren't actively monitoring their adjusted net income. If you're close, review your expected income well before reconfirmation and take advice. The responsibility ultimately sits with both HMRC to explain the rules clearly and advisers to help families avoid an avoidable mistake.
Copy

Editor
Nouran Moustafa
Practice Principal & IFA at Roxton Wealth
This is not a harmless simplification; it is a serious communication failure. HMRC is presenting a technical cliff-edge test as ordinary earnings, when a parent on a £95,000 salary could lose the entire benefit because of a bonus, dividends, rental income or savings interest. Meanwhile, a household earning considerably more overall may still qualify because neither parent individually crosses £100,000.

The families hit hardest are those close to the line with variable income and high childcare costs. Losing up to £2,000 per child because adjusted net income is £1 too high is policy design at its bluntest.

Before reconfirming, parents should calculate expected full-year adjusted net income, include every taxable source and check whether pension contributions or Gift Aid alter the figure. HMRC must explain the rule accurately, but advisers, accountants and employers should also flag the danger before bonuses are paid—not after the childcare support disappears.
Copy

Editor
Philly Ponniah
Chartered Wealth Manager and Financial Coach at Philly Financial
One of the least understood parts of adjusted net income is benefits in kind. I’ve seen private medical insurance, especially after adding a new child to a policy, push adjusted net income over the limit without parents realising, costing them thousands in Tax-Free Childcare and funded childcare hours. Most people don’t even know benefits in kind count, let alone where to find the value. I regularly run childcare strategy sessions and have helped families save around £9,000 a year simply by understanding the rules. Pension contributions are often the simplest way to stay below the threshold. In London, many families earning around £100,000 feel far from wealthy, and when this is combined with the personal allowance taper, the cliff edge is particularly painful.
Copy

Editor
Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
Parents should watch out for small things like interest on cash in the bank. This is often something easily forgotten but a couple of quid in interest could cost thousands in lost childcare hours if it takes them above the £100k mark!